Additional Practice Questions MT #2 – Flashcards
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Sarbanes-Oxley and the Securities Exchange Commission restrict auditors from providing many consulting services to their publically traded audit clients. Which of the following is true for auditors of publically traded companies? I. They are restricted from providing consulting services to privately held companies. II. There is no restriction on providing consulting services to non-audit clients. A) I only B) II only C) I and II D) Neither I or II
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B
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The organization that is responsible for providing oversight for auditors of public companies is called the ________. A) Auditing Standards Board. B) American Institute of Certified Public Accountants. C) Public Oversight Board. D) Public Company Accounting Oversight Board
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D
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Which of the following recognizes that an audit conducted under generally accepted auditing standards may not detect all material misstatements? A) Insurance. B) Professional judgment. C) Persuasiveness of audit evidence D) Reasonable assurance.
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D
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Standards issued by the Public Company Accounting Oversight Board must be followed by CPAs who audit: A) both private and public companies. B) public companies only. C) private companies, public companies, and nonprofit entities. D) private companies only.
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B
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Which one of the following is not one of the three General Standards? A) Proper planning and supervision. B) Independence of mental attitude. C) Adequate training and proficiency. D) Due professional care.
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A
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The scope paragraph of the standard unqualified audit report states that the audit is designed to: A) discover all errors and/or irregularities. B) discover material errors and/or irregularities. C) conform to generally accepted accounting principles. D) obtain reasonable assurance whether the statements are free of material misstatement
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D
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The standard audit report refers to GAAS and GAAP in which paragraphs? GAAS GAAP A) Scope only Opinion only B) Intro only Scope & Opinion C) Intro & Scope Opinion only D) Intro only All paragraphs
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A
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All of the following are conditions requiring a departure from a standard unqualified audit report except: A) management refused to allow the auditor to confirm significant accounts receivable for which there were no alternative procedures performed. B) Management decided not to allow the auditor to confirm significant accounts receivable, but the auditor obtained sufficient appropriate evidence by examining subsequent cash receipts. C) part of the audit was performed by other auditors whose report was furnished to the principle auditor. D) management has determined that fixed assets should be reported in the balance sheet at their replacement values rather than historical costs. The auditors do not concur.
answer
B
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When there is uncertainty about a company's ability to continue as a going concern, the auditor's concern is the possibility that the client may not be able to continue its operations or meet its obligations for a "reasonable period of time." For this purpose, a reasonable period of time is considered not to exceed: A) six months from the date of the financial statements. B) one year from the date of the financial statements. C) six months from the date of the audit report. D) one year from the date of the audit report
answer
B
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William Gregory, CPA, is the principal auditor for a multi-national corporation. Another CPA has examined and reported on the financial statements of a significant subsidiary of the corporation. Gregory is satisfied with the independence and professional reputation of the other auditor, as well as the quality of the other auditor's examination. With respect to his report on the consolidated financial statements, taken as a whole, Gregory: A) must not refer to the examination of the other auditor. B) must refer to the examination of the other auditor. C) may refer to the examination of the other auditor. D) must refer to the examination of the other auditors along with the percentage off consolidated assets and revenue that they audited.
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C
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Generally, no reference is made in the auditor's report to other auditors who perform a portion of the audit when: I. The other auditor audited an immaterial portion of the audit. II. The other auditor is well known or closely supervised by the principle auditor. III. The principle auditor has thoroughly reviewed the work of the other auditor. A) I and II B) I and III C) II and III D) I, II and III
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D
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Indicate which changes would require an explanatory paragraph in the audit report. The CPA concludes there is substantial doubt about the entity's ability to continue as a going concern Change from FIFO to LIFO A) Yes Yes B) No No C) Yes No D) No Yes
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A
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When the auditor determines the financial statements are fairly stated and then determines that the auditor lacks independence, the auditor should issue: A) an adverse opinion. B) a disclaimer of opinion. C) either a qualified opinion or an adverse opinion. D) either a qualified opinion or an unqualified opinion with modified wording.
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B
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The introductory paragraph of the standard audit report states that the financial statements are: A) the responsibility of the auditor. B) the responsibility of management. C) the joint responsibility of management and the auditor. D) the responsibility of the Board of Directors.
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B
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The introductory paragraph of the standard audit report states that the auditor is: A) responsible for the financial statements and the opinion on them. B) responsible for the financial statements. C) responsible for the opinion on the financial statements. D) jointly responsible for the financial statements with management
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C
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Which of the following statements is true? I. The auditor is required to issue a disclaimer of opinion in the event of a material uncertainty. II. The auditor is required to issue a disclaimer of opinion in the event of a going concern problem. A) I only B) II only C) I and II D) Neither I nor II
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D
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When a client fails to follow GAAP, the audit can be unqualified, qualified, or adverse depending on the materiality. What factors affect materiality that an auditor should consider? A) The dollar amount in comparison to a base. B) If the misstatement can be measured. C) The nature of the item. D) All the above are factors an auditor should consider regarding materiality.
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D
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When a qualified or adverse opinion is issued, the qualifying paragraph is inserted: A) between the introductory and scope paragraphs. B) between the scope and opinion paragraphs. C) after the opinion paragraph, as a fourth paragraph. D) immediately after the address, as the first paragraph.
answer
B
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Which of the following is a factor that relates to attitudes or rationalization to commit fraudulent financial reporting? A) Significant accounting estimates involving subjective judgments. B) Excessive pressure for management to meet debt repayment requirements. C) Management's practice of making overly aggressive forecasts. D) High turnover of accounting, internal audit and information technology staff
answer
C
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The underlying reason for a code of professional conduct for any profession is: A) the need for public confidence in the quality of service of the profession. B) that it provides a safeguard to keep unscrupulous people out. C) that it is required by federal legislation. D) that it allows licensing agencies to have a yardstick to measure deficient behavior.
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A
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Which of the following statements is true when the CPA has been engaged to perform an audit of financial statements? A) The CPA firm is engaged and paid by the client; therefore, the firm has primary responsibility to be an advocate for the client. B) The CPA firm is engaged and paid by the client, but the primary beneficiaries of the audit are those who rely on the financial statements. C) Should a situation arise where there is no convincing authoritative standard available, and there is a choice of actions which could impact a client's financial statements, the CPA is free to endorse the choice which is in the investors' interests. D) The CPA firm has primary responsibility to the FASB.
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B
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When CPAs are able to maintain their actual independence, it is referred to as independence in: A) conduct. B) appearance. C) fact. D) total
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C
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Financial interests of family members of a CPA can affect the CPA's independence. Which of the following parties would not be included as a "direct financial interest" of the CPA? A) Spouse B) Dependent child C) Relative supported by the CPA D) Sibling living in the same city as the CPA
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D
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An example of an "indirect ownership interest in a client" would be ownership of a client's stock by a member's: A) dependent child. B) spouse. C) non-dependent grandfather. D) All of the above are examples of indirect ownership
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C
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When determining whether independence is impaired because of an ownership interest in a client company, materiality will affect ownership: A) in all circumstances. B) only for direct ownership. C) only for indirect ownership. D) under no circumstances
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C
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Which of the following is least likely to impair a CPA firm's independence with respect to an audit client in the Oklahoma City office of a national CPA firm? A) A partner in the Oklahoma City office owns an immaterial amount of stock in the client. B) A partner in the Jersey City office owns 25% of the client's stock. C) A partner in the Oklahoma City office, who does not work on the audit engagement, previously served as controller for the audit client. D) A partner in the Chicago office previously served as vice president of finance for the audit client.
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D
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Privity of contract exists between: A) auditor and the federal government. B) auditor and third parties. C) auditor and client. D) auditor and client attorney
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C
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Which of the following statements is true? Gross negligence may constitute constructive fraud Fraud requires the intent to deceive All fraud should be detected during audit A) Yes Yes No B) No Yes No C) Yes No Yes D) No No No
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A
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The legal term for when an auditor issues an opinion of an audit, knowing that an adequate audit was not performed is called? A) breach of contract B) tort action for negligence C) constructive fraud D) fraud
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C
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Under the Securities Exchange Act of 1934, which type of organization is required to submit audited financial statements to the SEC? A) Every company with securities traded on national and over-the-counter exchanges. B) Every corporation. C) Every company issuing new securities. D) Every corporation which is chartered by a state government.
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A
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Which of the following statements is most correct regarding errors and fraud? A) An error is unintentional, whereas fraud is intentional. B) Frauds occur more often than errors in financial statements. C) Errors are always fraud and frauds are always errors. D) Auditors have more responsibility for finding fraud than errors.
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A
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The auditor has considerable responsibility for notifying users as to whether or not the statements are properly stated. This imposes upon the auditor a duty to: A) provide reasonable assurance that material misstatements will be detected. B) be a guarantor of the fairness in the statements. C) be equally responsible with management for the preparation of the financial statements. D) be an insurer of the fairness in the statements.
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A
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The auditor should not assume that management is dishonest, but the possibility of dishonesty must be considered." This is an example of: A) unprofessional behavior. B) an attitude of professional skepticism. C) due diligence. D) a rule in the AICPA's Code of Professional Conduct.
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B
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If the auditor were responsible for making certain that all of management's assertions in the financial statements were absolutely correct: A) audits would be much less thorough. B) bankruptcies would be reduced to a very small number. C) audits would be much easier to complete. D) audits would not be economically practical.
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D
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In describing the cycle approach to segmenting an audit, which of the following statements is not true? A) All general ledger accounts and journals are included at least once. B) Some journals and general ledger accounts are included in more than one cycle. C) The "capital acquisition and repayment" cycle is closely related to the "acquisition of goods and services and payment" cycle. D) The "inventory and warehousing" cycle may be audited at any time during the engagement since it is unrelated to the other cycles.
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D
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Which of the following is not one of the three categories of assertions? A) Assertions about classes of transactions and events for the period under audit B) Assertions about financial statements and correspondence to GAAP C) Assertions about account balances at period end D) Assertions about presentation and disclosure
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B
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Which of the following statements about the existence and completeness assertions is not true? A) The existence and completeness assertions emphasize different audit concerns. B) Existence deals with overstatements and completeness deals with understatements. C) Existence deals with understatements and completeness deals with overstatements. D) The completeness assertion deals with unrecorded transactions.
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C
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In testing for cutoff, the objective is to determine: A) whether all of the current period's transactions are recorded. B) whether transactions are recorded in the correct accounting period. C) the proper cutoff between capitalizing and expensing expenditures. D) the proper cutoff between disclosing items in footnotes or in account balances.
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B
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The detail tie-in objective is not concerned that the details in the account balance: A) agree with related subsidiary ledger amounts. B) are properly disclosed in accordance with GAAP. C) foot to the total in the account balance. D) agree with the total in the general ledger
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B
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________ is fraud that involves theft of an entity's assets. A) Fraudulent financial reporting B) A "cookie jar" reserve C) Misappropriation of assets D) Income smoothing
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C
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Which of the following is a factor that relates to incentives or pressures to commit fraudulent financial reporting? A) Significant accounting estimates involving subjective judgments. B) Excessive pressure for management to meet debt repayment requirements. C) Management's practice of making overly aggressive forecasts. D) High turnover of accounting, internal audit, and information technology staff.
answer
B
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SAS No. 99 requires auditors to document which of the following matters related to the auditor's consideration of material misstatements due to fraud? A) Reasons supporting a conclusion that there is not a significant risk of material improper expense recognition. B) Procedures performed to obtain information necessary to identify and assess the risks of material fraud. C) Results of the internal auditor's procedures performed to address the risk of management override of controls. D) Discussions with management regarding separation of duties
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B
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With whom should the auditor communicate whenever he or she determines that senior management fraud may be present, even if the matter might be considered inconsequential? A) PCAOB B) audit committee C) an appropriate level of management that is at least one level above those involved D) the internal auditors
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B
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Analytical procedures can be very effective in detecting inventory fraud. Which of the following analytical procedures would NOT be useful in detecting fraud? A) Gross margin percentage B) Inventory Turnover C) Cost of sales percentage D) Accounts payable turnover
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D
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As part of the brainstorming sessions, auditors are directed to emphasize: The need for professional skepticism The audit team's response to potential fraud risks A) Yes Yes B) No No C) Yes No D) No Yes
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A
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As part of designing and performing procedures to address management override of controls, auditors must perform which of the following procedures? Examine all journal entries above the level of materiality Review accounting estimates for biases A) Yes Yes B) No No C) Yes No D) No Yes
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D
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The ___________ rate may be defined as approximately the rate a bank could earn by investing in U.S. treasury notes for the same length as the length of a business loan. A) Nominal B) Stated C) Risk-free D) Prevailing
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C
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In "auditing" financial accounting data, the primary concern is with: A) determining whether recorded information properly reflects the economic events that occurred during the accounting period. B) determining if fraud has occurred. C) determining if taxable income has been calculated correctly. D) analyzing the financial information to be sure that it complies with government requirements.
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A
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Which one of the following is not a Field Work Standard? A) Adequate planning and supervision. B) Due professional care. C) Understand the entity and its environment including internal control. D) Sufficient appropriate audit evidence
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B
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The third general standard states that due care is to be exercised in the performance of an audit. This standard is generally interpreted to require: A) objective review of the adequacy of the technical training of firm personnel. B) thorough review of the existing internal control structure. C) critical review of work done at every level of supervision. D) periodic review of a CPA firm's quality control procedures.
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C
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When determining whether an exception is "highly material," the extent to which the exception affects different elements of the financial statements must be considered. This concept is called: A) Materiality B) Pervasiveness C) Financial Analysis D) Ratio Analysis
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B
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What is the term used to identify the risk that the client's financial statements may be materially false and misleading? A) Business risk B) Information risk C) Client risk D) Risk assessment
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B
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Audit evidence is usually considered sufficient when: A) It is reliable B) There is enough quantity to afford a reasonable basis for an opinion on financial statements C) It has the qualities of being relevant, objective, and free from unknown bias D) It has been obtained through random selection methods
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B
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The state of mind that characterizes the auditors' appropriate questioning and critical assessment of audit evidence is referred to as: A) Due care B) Independence in appearance C) Professional judgment D) Professional skepticism
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D
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Which of the following is least related to the concept of independence in appearance? A) The auditors' objectivity and ability to act impartially toward the client B) The perceptions of individuals who rely on the financial statements and auditors' opinion on the financial statements. C) The ownership of a financial interest in a client by the auditor D) The employment of the auditor's family member in an important position with the client
answer
A
